Number of Big Deals Drops in 2009

The best news about mergers and acquisitions in 2009 is that it is now 2010.

Even excluding the back-to-back multibillion-dollar sales of Alltel Corp. - one announced in 2007 and the second in 2008 - the roster of large deals involving Arkansas companies or assets announced last year was anemic. The number of deals known or believed to be valued at $9 million or more went from 75 each in '07 and '08 to 58 in 2009.

(To see the list of the biggest deals of 2009, click here. A spreadsheet version is available here. For the list of Arkansas Development Finance Authority bond deals of 2009, click here.)

The drop in volume last year was significantly steeper than national figures, but trends do tend to arrive in Arkansas a bit late. The rest of the country saw M&A activity drop dramatically in 2008, while Arkansas companies were still wheeling and dealing. Over the past two years, though, deal-making in both the state and nation is off by more than 20 percent, according to running totals compiled by Factset Mergerstat LLC of Santa Monica, Calif.

And the size of the deals is also down. Only two on our new list reached the billion-dollar mark - and just barely. The largest was Windstream Corp. of Little Rock's $1.1 billion deal, announced in November, to purchase Iowa Telecommunications Services Inc. of Newton, Iowa. Next was a $1 billion bond issue by Wal-Mart Stores Inc., for which a billion dollars represents less than one day's total sales.

Marshall McKissack, managing director and head of mergers and acquisitions at Stephens Inc. of Little Rock, said a frozen credit market made it harder for acquisition-minded companies to buy last year and general economic conditions made selling less attractive. Owners and managers of well-run companies have been focused on basic business operations - especially when sales prices haven't been overly attractive.

"Valuations are down considerably from the beginning of 2008 and 2007. That has caused a lot of people to rethink selling," McKissack said last week. "Owners of businesses that have great business models and weren't levered, weren't burdened down with a lot of debt, they have the ability to continue to operate their businesses and wait for a better day."

That better day is coming, he said.

"Our expectation is that 2010 will be a better year," McKissack said. "People feel like they have averted the bottom of the crisis, and while I wouldn't say [credit] has returned to 2007 or [early] 2008 levels, banks are willing to lend a little bit more. That makes the ability to get a transaction done a little bit easier."

Willing bankers and improved prices will help lift the M&A phenomenon this year. But primarily, McKissack said, it's just time for business to get back to normal.

"There is a pent-up demand of folks wanting to think about transactions in 2010 because they haven't been able to think about it for the past 15 months. And from a strategic perspective, there are opportunities that strategic companies need to look at to achieve their objectives."

The pipeline of M&A business for Stephens Inc., which does business all over the country and internationally, has increased "substantially" during the past few months, McKissack said.

"Deals that would have been nice 18 months ago now seem more strategic," he said. "Maybe you didn't sell in 2007 and wished you had some liquidity during the crisis. Some of those people may take their chips off the table, diversifying their holdings so that it's not all wrapped up in one asset, their business."

Even so, the deals that get done this year won't look like those cobbled together in 2007 and earlier, he warned. No one should expect to borrow two-thirds or three-quarters of the purchase price, as was common in the not-too-distant past.

"You saw some transactions that were seven times debt to EBITDA," he said, using the term for operating cash flow before taxes and other expenses, and deals in which well over half of the purchase price was borrowed were common in the middle of the last decade. Those are history. The equity needed to get deals done was starting to creep up by 2008, and now "it just requires more equity to get a transaction done in 2010 than it did in 2005, 2006 and 2007," McKissack said.

Cash-rich private equity investors have, in recent months, found it easier to just write checks for the entire purchase price, he said. - mainly because deals can be done a lot faster that way, but also in hopes of being able to leverage more later. But buyers who aren't sitting on that kind of cash will have to think creatively - possibly by issuing new stock or crafting earn-out agreements with the sellers.

McKissack said he hadn't noticed a particular rush to consolidate in any one industry, but he did note that acquirers of public companies aren't paying the kind of premium over market price that they were during the depths of the stock market swoon.

A year ago, premiums of 50 percent on public company stocks were common, a recognition by buyers that stock prices were artificially low and not necessarily representative of a company's fundamental worth. But as stock prices have rebounded, the premiums offered for public companies have returned closer to the historic average of about 30 percent.

The List
Arkansas Business' annual list of biggest deals includes deals that were announced in 2009, not necessarily those that were closed during the calendar year. For instance, the $28.1 billion sale of Alltel Corp. to Verizon Wireless was officially completed in January 2009, but it led our list of the biggest deals of 2008 because it was announced in June of that year.

Similarly, Windstream's list-topping acquisition in Iowa has not yet closed and is not expected to until mid-2010.

The list is subjective in some ways. Verizon divested former Alltel assets during 2009, but they were not assets in Arkansas, so they are not included on the list. However, we did include Verizon's $200 million sale of former Alltel assets to Atlantic Tele-Network Inc. of Salem, Mass., because that deal forms the foundation of a sizable new subsidiary headquartered in Little Rock, Allied Wireless Communications Corp.

Construction projects, even those valued above our arbitrary cutoff of $9 million, were generally not included on the biggest deals list. Instead, they go on our annual list of the largest commercial construction projects.

However, construction projects associated with the arrival of entirely new industries in the state - Caterpillar Inc. at North Little Rock and Mitsubishi Power Systems Americas Inc. at Fort Smith, for instance - are included on the list of deals, as are bond issues to finance construction projects.

And Kroger Co.'s plan to spend $125 million in Arkansas also made the list, even though most of those dollars will be spent on multiple construction sites.

Windstream and Uncle Sam
Windstream, the wireline telephone and Internet service provider that was spun off from Alltel in one of the biggest deals of 2006, was the heavyweight champ of deal-making in 2009. In addition to the $1.1 billion deal for Iowa Telecommunications, CEO Jeffery Gardner announced three other big acquisitions last year: $643 million for NuVox Inc. of Greenville, S.C.; $330 million for D&E Communications of Ephrata, Pa.; and $141 million for Lexcom Inc. of Lexington, N.C.

The only other buyer to show up more than twice was, in an unmistakable sign of the times, the U.S. Treasury. Uncle Sam bought stock in 11 Arkansas banks as part of the bank bailout "Capital Purchase Program," and nine of those purchases exceeded $9 million.

The federal government also shows up as the buyer in a $15.7 million deal with Biotechnical Services Inc. of North Little Rock to provide support services to the National Toxicology Program.

New Discoveries
Many - maybe most - M&A deals are announced without dollar signs attached. Twelve of the deals on our list have no price tag but are believed to be in the $9 million range or above.

When a publicly traded company is involved, the price usually appears deep inside a subsequent quarterly report to the Securities & Exchange Commission. For instance, the sale of Sparks Health System of Fort Smith to Health Management Associates of Naples, Fla., was announced in August, but the $138 million price wasn't revealed until December.

One of the deals on our list is undoubtedly far more than $9 million, and the value will likely become known in the near future. But at this writing, it still isn't known how much CI Capital Partners LLC of New York is paying for Transplace, the logistics firm with annual revenue of $700 million that is jointly owned by J.B. Hunt Transport Services Inc. of Springdale. That deal was announced last month.

Merkle Inc. of Columbia, Md., shows up on the list with two Arkansas-related deals of unknown value. The first was its purchase in May of CognitiveData Inc. of Little Rock, and the second is CognitiveData's July purchase of CMS Direct of Minneapolis.

Research for this list did turn up the unreported price tags of three previously announced deals that weren't large enough to make the list:

  • Community Health Systems Professional Services Corp. of Franklin, Tenn., paid $2.7 million for the 74-bed Siloam Springs Memorial Hospital. That deal, structured as a short-term lease with a new facility to be built after four years, was announced in February.
  • Amedisys of Baton Rouge, La., paid $3.2 million to White River Health System of Batesville for three home health agencies and one hospice agency. That deal was announced last January.
  • Acxiom Corp. of Little Rock paid $3.8 million for a 51 percent interest in DMS, a marketing business working in Saudi Arabia and the United Arab Emirates. That deal was announced in September.